Beazley
Price £6.76
52 week high-low £6.95 – £3.65
Net Yield 1.87%
Hist/Pros PER 18/37
Equity Market Cap (M) £4,508
Financials
Sarah Booth, Head of Investor Relations
Beazley is a London listed insurance company which achieved sales of £2.4 billion in 2022, up from £1 billion in 2021. They have five main divisions being Cyber, MAP, Speciality, Digital and Property. MAP covers Marine, Energy, Cargo, Liability, Aviation and Space + Accident, Political, Life and Terrorism. Property covers North America Commercial, Jewellery, HNW homes and Reinsurance.
Speciality covers executive liability, Environmental, Healthcare, M&A and Special Reinsurance. They think that Beazley is good at innovative products for complex insurance needs and that complexity took them into areas where the insurance product was not commoditised. Beazley’s divisions tended to be non-correlated, meaning they could make the best use of their capital via intra-group reallocation, rather than returning it to shareholders when market pricing was unattractive.
Cyber has been a recent success story with a rapid rise in sales. It is aligned with a consultancy service which audits cyber risk prior to agreeing to insure, reducing the likelihood of an impactful cyber-attack. They also have a post-attack service which helps with recovery and other issues like paying ransoms using digital currency. This makes for sticky clients and repeat business. Pricing in the other divisions remains strong.
Beazley appears to be a well-run insurance company that has just raised an additional £350 million to take advantage of strong insurance markets in Property in particular. They also raised another £40 million with a catastrophe bond. The risks are that social inflation (usually US juries awarding high awards in court cases) and claims inflation (such as the cost of property repairs escalating) continues and that bad weather drives larger than expected claims on their property and reinsurance books.
Chemring
Price £2.86
52 week high-low £3.84 – £2.71
Net Yield 1.76%
Hist/Pros PER 17/15
Equity Market Cap (M) £812
Industrials
Andrew Lewis, CFO and Rupert Pittman, Director of Corporate Affairs
Rupert began with a review of the history of the group. For much of the noughties, Chemring benefited from demand from the Iraq and Afghanistan wars and increased this exposure through c.£450m worth of M&A, much of which was debt funded. Following the 2011 drawback from Afghanistan, Chemring’s demand dried up and the group was left servicing expensive debt. The 2010s were punctuated with a series of divestitures and profit warnings until the current CEO took over in 2019 and overhauled the group. Following the sale of non-core, lower margin businesses the group has emerged smaller but more focused. 63% of the business remains in Countermeasures & Energetics (C&E) (i.e. missile deterring flares) for which the business was originally famous, but the remaining 37% is in the more exciting Sensors & Information segment (S&I), which has been funded by the steady cash flows of the annuity C&E segment.
They have tried to provide more information on this segment in recent years and shine a light on the Roke business in particular, which accounts for 68% of S&I revenue. Roke engages in cyber security, data science and electronic warfare and is expected to double over the next five years. The rest of the S&I segment is in the US and is made up of a small number of large programs with the US government. Chemring is well exposed to both UK and international defence priorities, but the near-term focus of investors will likely be the US sensors business where a big contract decision is due in H1.
Diploma
Price £27.60
52 week high-low £30.22 – £20.90
Net Yield 1.93%
Hist/Pros PER 36/24
Equity Market Cap (M) £3,483
Industrials
Kellie McAvoy, Head of Investor Relations
On face value, Diploma looks to be a muddled industrial distributor. It has many operational businesses, it does not specialise in a particular niche and it operates across three seemingly disparate sectors of Controls, Seals and Lifesciences. It’s hard to see the similarities of distributing motorsport fasteners, construction machinery gaskets and clinical diagnostic instruments.
But a company doesn’t achieve a five year compounded annual sales growth of +18% (+6% organically) and a 19% operating margin (adjusted) without having a clear, tried and tested strategy. Diploma’s strategy is underpinned by ‘value-added’ distribution. In practice this means that in addition to standard distribution services, Diploma can also provide technical advice, conduct component testing, and offer a broad product range alongside next-day delivery. Such value-added services create customer loyalty, pricing power and some of the best operating margins in the distributor industry.
This model works across different product categories. Aside from whether they can offer a value-added service, the only thing that holds the company back from moving into new categories is scalability. Diploma say growth opportunities are easy to come across, as they typically operate in fragmented markets where no player has a significant market share, but note that the group cannot manage an infinite number of product lines. Thus the ones they choose need to be scalable, over a long time horizon, in order for the group to achieve sustainable growth. Choosing the right products and successfully scaling them are therefore some of the biggest challenges for management.
CONSUMER DISCRETIONARY Frasers Group
Whitbread
COMMUNICATION SERVICESMeta
CONSUMER STAPLESCranswick
Henkel
ENERGYShell
FINANCIALSBeazley
Burford Capital
IP Group
Lloyds
HEALTH CAREAstraZeneca
GSK
Novartis
Novo Nordisk
Roche Holding
INDUSTRIALSdiscoverIE
Diploma
Raytheon Technologies,
QinetiQ
INFORMATION TECHNOLOGYASML
Halma
MATERIALSGivaudan
Croda International
REAL ESTATEBig Yellow
Shaftesbury
UTILITIESNational Grid
Sir John Royden, Head of Research
Michael Bray, CFA, Research Analyst
Henry Birt, Assistant Research Analyst
